Four Key Concepts of Accounting

Accounting is no easy job. It requires a mind for pure numbers and calculations with a sense for the world of business. Whether an accountant is employed within a single company, or acts as an intermediary for an entire industry, there are many factors which the accountant must master in terms of translating numbers, figures, assets and flows from one recognizable set of data to the next. How does one translate sales of manufactured products and intangible services? How is a company’s competitive edge measured in terms of employee expertise or speculative markets? How are financial standings understood regarding money earned and money owed? These are just some of the questions an accountant must be ready to answer.

There are several key concepts that are integral to the education of an accountant. These are:

– Revenue Recognition

– Fixed Assets

– Intangible Assets

– Goodwill

These concepts are inter-related in sometimes complex ways; sometimes these concepts overlap and sometimes they stand in contrast with one another. There are several published guidelines the accountant must be familiar with that sets standards and principles for defining these concepts, such as the GAAP (Generally Accepted Accounting Principles) and the IFRS (International Financial Reporting Standards). A thorough accounting program will ensure the future accountant is very familiar these standards and principles regulate how these four concepts function on a balance sheet.

Revenue Recognition

This is the principle which measures revenues of a company based on the company’s activity regardless of whether the company has been paid. In simple terms, it is how much money one can count on receiving in a certain period of time, and not how much money a company has at a given time. An example would be if I sold my services as a house cleaner for a future date, and will only get paid after the job is done. The money I am expecting becomes listed as revenue recognition.

Fixed Assets

This is also known as Property, Plant and Equipment (PPE). This relates to the assets of a company that has value but is not easily sellable or liquefiable. An example of this would be a printing press in a book publishing company, or a fleet of cars for a pizza delivery restaurant.

Intangible Assets

These are assets a company has that are not actual physical objects, and thus have no clear way of measuring or valuing them. The basic principle of intangible assets are time and effort that a company invests in order to make money. Examples of these are things like professional expertise, but also things like intellectual property.

Goodwill

This is closely related to intangible assets. In simple terms, goodwill are intangible assets that have been given some sort of monetary value because they have been sold. For example, if a pizza restaurant has a secret recipe for tomato sauce, in itself it is an intangible asset. But if they sell their recipe to another pizzeria, the value of that sale is listed as goodwill.

These are simple definitions with easy to understand examples. Accounting courses can be entirely dedicated to each one of these concepts. Knowing them individually and then understanding their relationship is core factor in mastering the concepts of accounting.